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Slate Money
The Hot Mess Edition
00:47:26
Slate Money talks to economist Tim Harford about his book Messy, Warren Buffett’s taxes, and contract theory.
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The following podcast contains explicit language.
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Hello, and welcome to the Hot Mess edition of Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Fusion. We have the whole team here. We have Kathy o', Neill, the author of Weapons of Mass, the National Book Award, long listed amazing tome.
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C
Hello.
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We have Jordan Weissman, who was not drowned in Orlando and is back safe and sound in sunny Brooklyn.
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A
I'm back, baby.
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And most excitingly, we have the best writer of books in the history of Authordom.
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C
It's true.
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Mr. Tim Harford.
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D
Hello, Felix.
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B
Hello, Tim. You have written how many books?
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D
This is number six. When I say this, I mean messy. The Power of Disorder to Transform Our Lives. We got that in, didn't we?
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B
Don't worry. Don't worry, Tim. We are going to talk about Messi. The Power of Disorder to Transform Our Lives very soon on Slate Money. But first of all, just tell us who you are.
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D
I'm a columnist for the Financial Times. For the last 10 years, I have been writing a column called the Undercover Economist every Saturday. And that's a column about economic ideas all around us in everyday life, along with the other five books, several of which are variants on the Undercover Economist title. And I also present a couple of shows for the BBC. One called More or Less, which is about statistics in everyday life. We've interviewed Kathy about her wonderful book, and there's a new one coming, the 50 things that shaped the Modern Economy that's coming in a few weeks.
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B
50.
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D
50.
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So that's what came up with three on this podcast, but you're going to come up with 50, which is kind of great. So, yeah, this is exciting. We have a genuine professional broadcaster on the show. And what's more, we have a genuine economist. You are an economist.
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D
I am an economist.
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B
And this is useful because this is the week that the Nobel Prize in Economics came out.
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D
I sense danger.
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B
Don't. And we are brooking no dissent on whether or not. You can call it the Nobel Prize. Yes. You can call it the Nobel Prize. All right, so Tim, being an economist, is going to explain to us what on earth this prize was given for. This is going to be an interesting discussion because it's been a bit confusing to a lot of people. Also, there's a certain person we're not allowed to name on this podcast. But one of the interesting things that has happened in the shadow of that person is that Warren Buffett has.
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D
Are we talking about Niall Top or just a presidential candidate?
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A
Okay, we're talking about Voldemort that's who we're discussing.
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B
But yeah, so we now have information about Warren Buffett's personal taxes, which we never had before, and I felt that that was interesting enough to justify an entire segment of its own. But first, because you have a new book out, it is called Messy, and it's basically how if you throw a podcast together without any clue of how it's going to be structured or what's going to happen, that's the best way to do a podcast.
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D
That is, it's the best way to make jazz, it's the best way to give a presentation, and it's certainly the best way to make podcasts about economics and finance.
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C
That's the scroll with me.
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Slate Money. Just like free jazz. That's what.
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D
So, yeah, I mean, that is part of the point of the book. So I have noticed that we have a tendency to try to pin everything down around us, to put a label on it, to quantify it, and maybe get computers to think about it for us. We like tidy desks, we like pre programmed schedules, or maybe you say schedules, and yet at the same time we say we really value the creativity and spontaneity and humanity and all of these cool things. And the argument of the book is actually, you can't get those things unless you're willing to tolerate a bit of mess.
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B
I feel like there are certain areas where I want creativity and then there are certain areas where I don't. Like when I'm trying to catch a train, I don't want this, you know, the train to arrive at a sort of creative time. I want it to arrive at a kind of.
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D
I think. Well, you're quite right. I mean, a really, really straightforward example, not even to do with creativity, but somewhere where mess is appropriate or perhaps inevitable, somewhere where it's not, is your office space, maybe your desk at work, whatever, or your kitchen. I'm actually quite a tidy person. My kitchen is really tidy. The cutlery goes in the cutlery drawer. The wine glasses go where the wine glasses go. The corkscrew goes in the corkscrew place. Everything has its place and I tidied it all away. But when you think about your study or your desk at work and you try and apply the same principle, everything should have its place, everything should go in its proper place. And Suddenly you're getting 200 emails a day, social media, magazines coming in, clippings from websites, digital documents, physical documents, and this motto, well, just put everything in its proper place. It doesn't make any sense. This is not a way in which we're actually designed to process all of this information. And when you look at studies of people who just pile up a whole bunch of stuff, let digital documents accumulate, let paper documents accumulate, versus people who file everything, put all their email in a folder, put all their paper in a filing cabinet, it's the pilers who actually are generally in better control of their information than the filers.
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A
So wait, are Inbox zero people, Inbox zero obsessive, Essentially self defeating. Then are you saying that they're creating more work for themselves and not accomplishing anything so.
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D
Well, it depends how you're getting to Inbox zero. Actually, Merlin Mann, who's very closely associated with Inbox Zero, he says, just stop trying to file all this stuff. Just make decisions and get on with it. Don't be that person who creates this enormous structure of folders and gets to Inbox zero by carefully tagging everything and pulling it into a particular folder, and then you can't see it. But you haven't actually done any work. You've just got this organizational system that now doesn't make any sense to you, and you can't actually understand or find your stuff. So I think Inbox zero is a different thing.
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B
I know Evernote, people who are obsessed with folders within folders, and Evernote, and I'm always kind of impressed by them, while at the same time convinced I could never be that way. I just have one filing system, which is the Gmail search bar, and I feel like that's all I need.
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D
Yeah, and there's academic research on this. A guy called Steve Whitaker, who I quote a few times in the book, he's a psychologist on the west coast, and he, he has a paper out called Am I Wasting my Time Organizing my Email? And his answer is, yep, you are. He basically installed spyware with permission on people's computers and examined 100,000 attempts by people to find their email. And he basically said, if you just use the search bar, it's just as quick. You're just as likely to get what you want. And you didn't waste all your time building these elaborate structures of folders.
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C
Thank God for this because, you know, I've never organized my email or my paper. So, I mean, I think who. Nobody actually has paper anymore.
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Right.
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Well, take a look at my desk.
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C
Oh, really?
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I mean, I have, like. I have things which I've written, notes I've written to myself on the back of envelopes. And yeah, I. If you're a journalist, which every so often I pretend to be. You interview people, you need to write things down somewhere. But I have a question for Tim, which is I have this idea that the opposite of messy is optimized in some way and I feel that there's too much optimization going on in the world and yet at the same time, everyone is optimizing for everything right now. Everyone is trying to maximize efficiency, minimize waste. And is this just the first sign of the apocalypse? Should we be worried about the amount of optimization and waste reduction that is going on?
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D
I think we might be. I'm going to ask Kathy to set us all straight after I've given my view on this. But one of the things that goes on when you've got an algorithm that's searching for a solution in a complex problem space is that algorithm can very easily get stuck if it's not properly designed. And the way it will do that is through step by step optimization process. Basically you zoom in, you're trying to get better and better and better and better, but actually you're on some tiny little dead end.
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B
Are we going to use the phrase local maxima here?
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D
We just did. So you get stuck on a local maxima, but basically you find the very best place down your dead end and you find that and you get stuck. Whereas a well designed algorithm, there are loads of different variants, depends on the kind of problem, but they all involve this randomization process early on. There's something throwing noise into the algorithm early on that basically says maybe you, you don't want to optimize in this very local way. Maybe instead you want to search much more broadly. And I mean, that's how it works for computers. But it's also, for example, how it works. When London commuters faced a tube strike a couple of years ago, half the London Underground stations were closed. When they reopened, thousands and thousands of Londoners had found better ways to get to work and they stuck with them. So this is not just about Keith Jarrett and Miles Davis and these jazz greats. Often it's all about everyday stuff like trying to get the, trying to get to work in the most efficient way. And realizing a Tube strike actually helps you find the right way.
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C
Yeah. So one of the things that you, like, define in the book that I never actually see, saw, defined in my life was the concept of filing a triplicate. Like filing a triplicate was this like thing that people did when they were being super anal. That was always, always a waste of time. But you actually explained it a little bit in the book, like what the triple why you file in triplicate?
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Well, I don't file in triplicate, but why people do.
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Why people used to.
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Yeah.
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Which is that they had three ideas as to why they might, in the future want to look this stuff up. And as Felix just explained, if we're thinking about, like, files and emails and things, that you have the Google search bar, and it solves that problem, and it solves every other problem, too. Right. The point is that the Google search bar is like, literally the best design of anything. And it has allowed us to have one pile of all our emails forever, you know, essentially ordered by recency. So we can look at. Just literally look at the first 20 and then search for anything else. So it's exactly what you said. What we do when we optimize for things is that we just sort of. We verily, we very narrowly define what we think we want, and then we solve for that very narrowed thing, and then we always end up. We might have that solution for that thing if we're in a good situation. Sometimes we don't even have that if we have failed. But even if we succeeded, we only have the solution for one question. Whereas a really good design, like the Google Search solves problems that we didn't even think about beforehand.
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D
Yeah, yeah, absolutely. And so. And as a result, it's more resilient.
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But it is messier.
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D
It is messier, but, you know, messy is.
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Messy is good.
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Messy is. Messy can be okay.
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A
One thing I liked about the start of the book is you talk about this idea of kind of also consciously injecting messiness into your creative process, right. That you talk about Brian Eno at length, and how when he was helping David Bowie record the Berlin Trilogy, he would have these just ridiculous prompts, essentially, for the musicians, and that forced them to just kind of get out of their comfort zone. And it's creating mess where there was none before. And it seems like.
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D
And they hated it, but it worked.
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So I guess, like, how. I mean, are there, aside from like, creative artists, like, you know, musicians just being told, okay, go, you know, put it, like, twist the spine of this song. What are, like, other really important aspects we're kind of injecting? Messiness actively kind of comes into play.
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D
You think, well, I mean, there is a whole tribe of people who almost religiously follow Eno's oblique strategies. Let's go to the cards. Let's consult my little app, which is going to throw this weird gnomic instruction at me. I wouldn't necessarily go that far. I think One thing you can do in an everyday sense is to say, okay, I've got a weekend coming up. I got a few habits that this is the kind of thing I like to do on my weekend. Maybe instead I should just write down six interesting things that I'm maybe a little bit scared to try. It's a bit new, it's a bit of a hassle, Give them a number, roll the dice and see where my weekend takes me. Just that sort of thing once in a while. I'm not saying every day do that, but maybe twice a year, you'd have really weird and interesting weekends. But the ultimate source of mess in our lives, I think, is other people. It's dealing with people who are different from us, who have different views, who are maybe 3 years old or whatever. And I think the most straightforward way that any of us could lead slightly messier lives is to make more effort to engage with people and spend time with people and try and work with people who see the world very differently. And that's actually. That's quite hard. We find it quite distressing and anxiety inducing.
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B
It does work. And one of the reasons it works is because sometimes it doesn't work. Like, weirdly about. I think about this a lot in the context of journalism, where now that journalism has become quantified up the wazoo, everyone is trying to optimize. I think of like Business Insider and various other sites where they're trying to basically optimize for getting the maximum number of page views out of the minimum number of employees and trying to make sure that you, you know, do everything in this kind of optimized way. And I contrast that with a statistic which I remember reading once about the Washington Post, which said that roughly 50%, they do these big investigative projects because they're the Washington Post. And these investigative projects can last for months. And roughly 50% of their investigative projects wind up just getting spiked at a relatively late date. And that's months and months of work which. Which results in absolutely nothing. And unless you're willing to accept that kind of thing, I feel like you're going to lose a lot of very important journalism. And I do worry that as the world becomes increasingly optimized, you just lose the corporate appetite to do wasteful things which create awesome results.
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C
And I'll jump in here and mention one of the things, one of the threads of emails I've been getting since writing my book as an anti algorithmic book is exactly what you're talking about in the context of academia, right? So what we're seeing, and it's happening a lot in Britain actually, is that there are these, that professors are being required to fill out these every few couple years, these reports describing how many papers they wrote and how many journals they, you know, or conferences they went to. And they have to quantify their progress in academic research, which is exactly where you should have. This kind of concept of waste is. Okay. Like if you try to do something for six years and it doesn't work out, that's okay because you have tenure, but it's increasingly becoming impossible to do that.
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D
Yeah, it's a real problem because you basically get people just writing tiny little tweaks on what they just wrote, plagiarizing their own work and just a lot of. And it actually becomes more difficult to figure out what is interesting, what's worth reading because everything is a slight echo of something that just came before.
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We are going to move on to an area where I am convinced that people optimize way too much and that is their taxes. And that there is a whole subset of millions and millions of Americans who are really proud of spending a huge amount of effort optimizing their taxes and trying to pay the minimum amount of taxes and maximizing the number of deductions they can take and they organize their mortgages and, and all manner of other things in such a way as to pay the minimum amount of taxes. Because obviously paying, paying taxes is a bad thing which you want to minimize. And I feel this is just a really kind of skew if, kind of way of looking at paying taxes. And I feel it's societally damaging because it puts you in mental opposition with the government. You don't feel like your interests are aligned with the government. You find you feel like your interests are diametrically opposed to the government.
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C
God, you're such a socialist today.
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I don't know if, I'm not sure if I agree with this off the bat, but I'll let you finish. Well, no. So Americans have an extremely high rate of tax compliance compared to a lot of other countries. And it just, I think part of the deal is we comply with our taxes because we know there are all sorts of creative ways we can take advantage. We can minimize them. It's sort of like we have this libertarian trick that doesn't want to pay them, but we go along with it because we're basically law abiding. We've created a system where you can at least deduct your mortgage.
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B
So, so I mean, so, I mean, we have talked about the insanity of the tax deductibility of mortgage payments on this show before. And we're not going to go too much into that. But I do want to say that I have a new hero this week, and his name is Warren Buffett.
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D
And was he not your hero before?
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A
Well, Felix has mixed feelings. Has very mixed feelings. We all do. I think on the show now he's a hero.
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B
I have mixed feelings about Warren Buffett, and actually, I have mixed feelings about Warren Buffett's tax rate as well. But one thing I like about Warren. So we discovered for the first time this week how much Warren Buffett paid in tax pays in personal taxes. This is something which we never knew, and now we know. And the answer is $3.82 million he paid in taxes in 2015 on taxable income of 11.56 million, which means an overall tax rate between federal and state taxes of 33%.
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D
And these numbers stirred complicated feelings in you, Felix.
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B
They did. They did. Because.
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D
Tell us more.
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A
So you transformed into psychologist, psychiatrist mode, therapist mode. Tell me more.
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B
So the first thing to know about these numbers is that 33% is not an obviously low tax rate.
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C
It's not compared to, like, Mitt Romney.
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B
And Warren Buffett is not trying to take a whole bunch of deductions. He takes two deductions, basically. One is the one which is just automatic, which you really can't not take, which is that you deduct your state income taxes from your income before you calculate your federal income taxes. And that's why he actually wound up paying more in state tax than he did in federal tax. And then the other one he took was deduction for charitable giving, which was just over $3 million, when he actually.
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A
Gave about like 2.5 billion that year or some.
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B
So that's the interesting thing, because you're allowed to deduct up to 30% of your income for charitable giving. And so the actual percentage of his taxable income that he gave was 24,715%. He gave 24,000% of his taxable income to charity in 2015. And this is normal for him, which.
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D
Does suggest that the concept of income itself or taxable income is slightly problematic.
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B
And so that's where. Exactly that's what I wanted to talk to you about, which is this idea that, you know, on the one hand, as an income taxpayer, he's doing a very simple thing. He's just going about his life in the way that he goes about his life. He's not trying to optimize anything for taxes. And then at the end of the year, he pays whatever the taxes are on whatever he did. And he has a very simple tax return. And it's no, you know, and he's not stressing it. And that's what I like about this. On the other hand, there's a couple of things I don't like about this. One is that he's a gazillionaire who's paying $3 million in taxes and as a percentage of his wealth, it's just zero, basically. And you're like, come on. And the other thing is that the reason he has basically no income is that he has structured Berkshire Hathaway, which is a highly profitable corporation, so that it pays no dividends. And he has nearly all of his wealth in Berkshire Hathaway stock. And if Berkshire Hathaway did pay dividends, he would have a fuck ton of income. And that again, metric or Imperial, feels like a bit of a tax dodge.
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A
It's also worth noting that Berkshire Hathaway itself is incredibly wily and aggressive about finding ways to minimize its taxes. When we talked about the Burger King deal, I believe we talked about how it's big on inversions where need be, literally exiling yourself to another your company, to another country in order to avoid US corporate taxes. A Washington Post columnist was talking about how they're very good about using, instead of selling companies and selling shares, they do cash and asset trades, which are essentially a fancy tax free way to cash in your equity in a holding. So it's not as if, you know, Warren is against minimizing his tax bill when it comes to Berkshire, which indirect, given that that's where all of his wealth is stacked up, that's essentially minimizing his own liability as well.
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B
And he's also, I mean, we should mention as well that he, in giving $2.86 billion to charity, mostly to the Gates foundation, which is, which is a good thing. And we approve of that. And obviously almost none of that was tax deductible, like on an income tax basis, on an annual tax basis. He's not saving taxes there, but he's reducing his wealth substantially so that if and when he finally dies, there's going to be no estate tax or much, much lower estate tax because he's going to have given all of this money away. And the idea that you can basically make $100 billion and then pay, never pay any tax on it just by giving it to charity, like people are like, oh, well, of course you gave it to a charity. That's just as good as giving it to the government.
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A
But I, it's not necessarily, I believe.
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B
That it should be an either or thing. I think if you make lots of money, you should pay your taxes and then give it to charity.
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D
And not all charities do good work.
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B
Right.
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C
I was going to say it's a pretty convincing argument for a wealth tax that you just made.
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B
Or like a pre charitable giving wealth tax. You can tax wealth and then once it's taxed, you can give your wealth to charity. But like, I don't feel that charitable deductions in general should be tax deductible either on a wealth basis or on an income basis.
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A
It's also what you know, Buffett's actually an interesting case study in why we kind of do need a corporate income tax. You'll occasionally hear kind of wild out there suggestions that we just scrap the corporate income tax entirely and we move to a pure consumption tax. The problem with that is you end up with a situation where people will stockpile their wealth in a corporation and let it grow essentially tax free as long as they can. And Buffett actually may be, given what we've seen from what his income is versus how much of his wealth is stocked up in Berkshire Hathaway, a living example of how that can unfold. Granted, on a very, very large scale that won't be reached often, but it is at least he might be exhibit A of why we do need to tax at the corporate level.
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D
But Felix, you said at the beginning of this segment that you felt that people spent too much time optimizing their taxes. So tell us a bit more about.
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A
That back to therapy mode.
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B
So yes, my general feeling is that the right way to do taxes is to optimize the time you spend worrying about taxes and have like one day a year in April where you just fill out a form and send it off and there's a number at the bottom and you get a refund or you write a check and then you get on with your life for the other 364 days of the year. And the wrong way to do it is to be obsessed with trying to minimize that tax bill every year and trying to find deductions and things which will only increase your chances of getting audited. And unless you have like a full time staff of accountants working for you, you do not want to get that audit.
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C
I'm just going to pile on and agree with Felix here that I've noticed a U shaped curve where the X axis is wealth or income and the curve describes how much people spend time thinking about money. So if you are. If you don't have enough money, you think about money a lot, and it's terrible if you have a lot of money. And this is my experience working in finance with people who have a lot of money. They think about money all the fucking time. And I'm just like, guys, money's actually really boring. And I feel like I'm very, very lucky to be in that space.
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D
Kathy o' Neill on the Slate Money podcast. But go on, just go on.
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C
No, but. Okay, well, there are obviously interesting things around money, but to actually think about those dollars and cents and as fel, how to avoid taxes and how to, like, shift earnings to a different year, blah, blah, blah. It's totally boring, actually. And living in that sweet spot in the middle of the U where you're like, I think about money, of course, because we all think about money, but I would like to minimize that. That is actually a goal of mine, and I'm glad to hear other people are like that, too.
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D
One of the things that disturbs me about all this, I think, by the way, you're both completely right, is the. The narrative about tax minimization, tax dodging, and so on, leads through to other forms of political cynicism. So, most straightforwardly, if you think that most people aren't paying their taxes and that smart people don't pay taxes, you want to be smart, right? And so you start looking for ways to dodge taxes, because you'd be an idiot not to run with a crowd. So the idea that lots of people are dodging taxes will encourage other people to try to dodge taxes. But also, I come to you from the land of Brexit. And I think one of the powerful underlying ideas behind Brexit was the idea that the City of London, which doesn't want Brexit to happen, they make lots of money and they don't pay any taxes, which is not true. I mean, the City of London is an enormous source of revenue for the British economy, for the British government. But I think people just feel that can't possibly be true. These guys don't give us anything. And so if we annoy them and they leave, good riddance.
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B
This was definitely a running theme of Mike Bloomberg's mayorship in New York City, was his insistence, which was, I guess, empirically true, but emotionally false, that having, you know, a bunch of gazillion dollar bonuses on Wall street was good for the city. He's like, look at these mass revenues that you get as a result we can invest that in the city. And everyone's like, no, I don't like those bankers with their bonuses and it's bad for the city.
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D
Yeah. But the idea that they're actually not paying taxes at all makes it even more toxic. And I mean, of course tax evasion is a very difficult thing to measure. I do wonder whether it might be exaggerated, but I don't know. There can't really ever be compelling numbers on how much tax evasion there is.
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A
I do want to push back a little bit on the idea that people should think less about their taxes or at least say why. One reason the US they have a really good reason to, which is that so much of what the government tries to do for middle and working class families is accomplished through the tax code. We've kind of, we've kind of engineered a society where people have to think about their taxes because that's how you get, you get to take advantage of our welfare state, which is for a lot of ideological and political reasons, submerged in, in the irs, essentially. And so, you know, probably not a.
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D
Great way to run a welfare state.
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B
But I 100% agree with you. I will agree with you insofar as you're talking about the Earned Income Tax Credit. I would disagree with you insofar as you're talking about things like deductions. Because the only people who take deductions, really, the coastal elite, the vast majority of Americans, don't take itemized deductions on their taxes. They just take the standard deduction, which is quite generous, and that's all you need to worry about.
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A
Yeah. And a lot of this could be avoided if we just had our taxes automatically prepared for us, or at least for the vast majority of Americans. The itemizers are the one exception.
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C
They should be automatically prepared. I just want to jump in and throw in, like, how predatory the tax preparation industry is and wasteful.
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D
So I have a homework assignment for Jordan because Jordan is the kind of guy who would do this brilliantly. So, Jordan, please go away and research for us and come write a great piece for Slate about it. What is the country and the world that has the most sensible tax system, the most streamlined, the fairest?
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B
I'm sure it's Sweden.
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D
Must be somewhere Scandinavian. But come and tell us all about it, Jordan.
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A
It's simple and easy to navigate. As an IKEA cabinet, I believe in.
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B
Both Sweden and Norway all tax returns are public that you can look up anyone's tax return that you want and see, which is fascinating. There's a catch with the public tax returns, which is that you can look up anyone's tax return you like, but every time you do that, the person whose tax return you look up is notified that you've looked at their tax return.
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A
Oh, so it's like they know you're stalking them on Facebook.
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B
So, Tim Harford, you're an economist who won the Nobel prize this year.
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D
The Nobel memorial prize was won by Oliver Hart and Bengt Holmstrom for.
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C
So they're 10 times first for all.
- [29:50]
D
Kinds of cool stuff to do with contracting and incentives. Incentives. I'm sure you don't want to hear the details, do you, Felix?
- [29:56]
B
Well, tell me one interesting detail. Actually, you know what? I warned Tim I would ask him this question, so I'm going to ask him this question because he's actually thought about this. We don't just throw this show together. It's not that much of a hot mess. Tim Harford. There is a rumor going around that Salesforce might buy Twitter. And certainly Marc Benioff, the CEO of Salesforce, seems vaguely interested in the idea of buying Twitter. So here's my question. Why would Salesforce want to buy Twitter when they could alternatively simply contract with Twitter to do whatever it is that they want Twitter to do for them?
- [30:37]
D
That's a very good question, Felix. I'm glad you asked me. So this is all to do with Oliver Hart's work. Not particularly Bengt Holmstrom's work. So Oliver Hart has written a lot of stuff about who has residual control. So you write a contract and people get paid to do certain things, but in the end, there's some profit left over, or somebody has the right to decide what happens. So that might be the shareholder of a company or it might be the owner of a house. The renter of a house has certain rights, but the owner of a house also has certain rights. They have the residual control rights over the house. So this is relevant to Twitter and Salesforce, but let me give you a much simpler example to give you a sense of what's going on. So you're a truck driver. Do you own your own truck or not? Or do you work for a trucking company which arranges all the deliveries for you? Now, there are arguments on both sides. So a truck's a really expensive piece of kit, and so as a driver, you want to really take care of it, make sure it doesn't get dented, make sure it doesn't get overdriven or driven badly, and really look after it. And that suggests that the truck driver driver should own the truck, on the other hand, this expensive piece of kit needs to be efficiently used. And the trucking company has control over dispatching and where it gets, how busy it is and all of that. So maybe the trucking company should be the one that owns the truck. And this is where Oliver Hart's ideas come in. And it turns out that the answer has changed since his original papers were written. So the answer used to be that truck driver should own the truck. Because what really matters is making sure the truck is taken care of. And then you've got better and better analytics that could tell trucking companies how the truck is being driven, how hard they're pressing on the accelerator, are they overusing the brake, are they driving in the right gear, all of this kind of stuff. And increasingly, trucking companies have started to take ownership of the trucks because it turns out that they are the ones who are better left with residual control. And all of this is fundamentally about when something unexpected happens, who gets to decide.
- [32:40]
C
Wait a second. I'm sorry, I know that was supposed to be the simple example, but I don't understand it because, I mean, I've looked at the trucking industry actually, and it seems like, and I agree with you, that it has changed dramatically. And there's an enormous amount of surveillance now on truckers who don't own their truck anymore. But that isn't really working, that working out well for the truckers at all. So who are we optimizing for here?
- [33:03]
D
So, I mean, it's a good question. The answer is, basically, we are pareto efficient. Well, this is supposed to be maximizing the overall surplus to be divided, but we don't know who ends up getting the lion's share of that. So let me talk about Salesforce and Twitter then for a second. So Twitter is 300 million pairs of eyeballs and a really cool instant messaging platform and a nice consumer friendly brand. Salesforce is a gigantic provider of software solutions for big corporations to help them handle their billing and marketing and all that kind of thing. So it might be that Salesforce would be interested in what Twitter brings to the table. Twitter has data which has this cool platform. So maybe Salesforce should make a contract with Twitter and buy some of that cool stuff off them. Or maybe Twitter would need to change. Twitter will need to lose some of its consumer friendly sheen. It will become less cool in a way that makes it more relevant to corporate outreach purposes. And so if Twitter needs to change in ways that can't easily be contracted, then the solution is for Salesforce to Take control over it. Because it's only if Salesforce take control over it that they can make sure that it changes in all of these unpredictable ways that you can't quite write down.
- [34:21]
B
And so would that amount to a prediction that if Salesforce buys Twitter, that's going to be bad for those of us who like Twitter in its present form because it will change in the way that we're going to design.
- [34:33]
C
They'll become more corporate and less cool.
- [34:35]
D
Yeah, I think that is my forecast. But on the other hand, we know that all economists forecasts are wrong. The truth is Hart and Holmstrom, I mean they're both very, very impressive economists. This is really technical work. And one of the things they've basically been rewarded for is creating new mathematical tools that other economists can use. So a lot of Nobel Prizes, when you actually try and explain the basic insight, sometimes it sounds really cool, but sometimes it's like I don't quite get it and it doesn't sound that impressive to me. And this is one of those cases. But these tools have been embraced by microeconomists everywhere and used like the Revelation principle, for example, which is a really cool kind of bit of economic theory that Ben Holmstrom helped to develop.
- [35:16]
B
Okay, now you've mentioned this, the Revelation principle. Is this something to do with the Bible?
- [35:22]
D
No. So the Revelation, we're really opening a big bag of econ theory all over.
- [35:28]
C
Slate money, chill it on the ground.
- [35:30]
D
Okay, so the Revelation principle is, this is about contract design. You're trying to figure out who gets paid, what to do what in certain circumstances is very, so potentially incentives, potentially very complex. And the Revelation principle is if there is an optimal contract, then there's a variant of that optimal contract that involves everybody actually telling the truth. And so what you can do when you're trying to solve these complex equations and try and figure out whether there's an equilibrium to your model, et cetera, is, you know, first you prove that there is a contract out there and then you say, okay, I am going to transform that contract mathematically into a contract where everybody tells the truth. And so it's easier for this is just a thing that makes economic theorists better able to identify solutions. Is a pure piece of math, but it is very elegant.
- [36:20]
C
It sounds like the risk free pricing model in finance.
- [36:25]
D
Yeah, it's a cool that we've got a solution here, but we can't find it. But we can prove it's equivalent to some other solution that we can find hardcore math now.
- [36:34]
C
Yeah, I interviewed my friend. Suresh who's an economist at Columbia about the two Nobel Prize winners. And he mentioned something really cool that I think is relevant to both our books. It's about incentives, and it's very similar to what you just said. But what he described was like, we all know that if you, you're gonna want, let's say you have an employee, you're gonna want your employee to do two things. One of those things is easy to measure, and one of those things isn't easy to measure. And you want to set up their incentives so that they basically do both things. If you only set it up to do the one that is easy to measure with, you know, because it's harder to measure that other one, then they're going to end up only doing that one thing.
- [37:15]
D
Absolutely. So this is Bengalmstrom's key contribution.
- [37:18]
C
Right.
- [37:19]
D
So, for example, let's say you're a teacher, for example, who's being judged by an evil algorithm as described in the wonderful book Weapons of Math Destruction by Cathy o'. Neill. So the algorithm might measure something really important that matters, but it might leave out other things that matter. And you're incentivizing teachers then to ignore all kinds of stuff that matters and instead focus on the one thing that the algorithm.
- [37:39]
B
So I'm banked Holmstrom, how do I solve that problem? So here's the. How do I incentivize it?
- [37:43]
C
At least? Suresh Naidu, the way he described it to me was you. Actually, there's a weighting scheme that is actually explicitly given by this Holmstrom paper that takes into account how difficult things are to measure, which is interesting.
- [37:56]
D
Yeah. The easier it is to measure something, the sharper you can have your incentives. But if there's something else important that's hard to measure, your incentives actually need to be. You can't make the performance bonus too sharp because you will make people start to game the system really badly.
- [38:13]
C
Yeah, you'll distort it.
- [38:14]
B
So basically what you do is you give them a bonus, which is just. I'll think up a number off the top of my head and it's not necessarily connected to the thing which is easy to measure. And I will be looking at this other thing, which is hard to be, which is hard to measure. And there's no particular number which I'm going to be looking at, but you're going to get compensated for that fuzzy stuff anyway.
- [38:35]
C
The fuzzy stuff is gonna be part of it. And it's, it's, you know, and the weights are actually given in the paper I mean like, so it's. And it's actually applied to a lot of situations, which is interesting too.
- [38:45]
D
And this is why actually even Today in the 21st century, a lot of people are paid in a kind of where we pay you a fixed wage and if you do well at your job at some. And by. Well, I mean, we're not going to tell you exactly what that means at some future stage, we'll give you a pay rise and we'll have to do that. Otherwise you'll leave and go and work for someone else. And it's all quite vague. And Bengt Holmstrom's work shows us why. Actually the vagueness is often exactly what you want.
- [39:13]
C
Proof of vagueness.
- [39:14]
B
White collar jobs in general are paid on a very vague. And it kind of, I think that that's connected to this Nobel Prize. The fact that as the stuff that we do becomes much less increasingly divorced from, you know, the number of hours that we spent standing on the production line, then the way that we're compensated for that work has to also become a little bit fuzzier because we're doing.
- [39:40]
D
Lots of different things and they're all hard to measure. And if you start incentivizing someone to do one particular thing, they're going to ignore the rest of their job.
- [39:47]
C
Count the widgets per hour. Yeah, that's not enough.
- [39:49]
A
I will say some of their insights on incentives are also good case studies in how economists are ignored, maybe to society's peril at points. Like one of the, one of the ideas that came out of Holmstrom's papers were that you shouldn't compensate a CEO just based on stock price. You should compensate based on basically what his peers are peer companies are also doing and how they compare versus that. And famously big companies don't do that. And one of the ways we know that how CEO compensation is kind of skewed is that CEOs do seem to get compensated based on the luck of their industry and how things are going up against for going up and down for all the companies. And so it's like, you know, some Nobel Prize winning work that has just sort of been like, oh, this is a great theory. This is almost obviously correct. It's just not applied.
- [40:30]
D
Yeah, if you're, if you run an oil company, you get rewarded when the oil price goes up. You get penalized when the oil price goes down. Was in fact, you should be, your bonuses should be adjusting for that because that's obviously not in your control.
- [40:41]
B
Although CEO pay in general, we can have an A Whole podcast edition on CEO pay is a fascinating, fascinating thing.
- [40:49]
D
I'll come back for that, Felix, because I think you probably have feelings about that, too. And I want to talk about your feelings about.
- [40:55]
B
I have feelings. I have feelings specifically about Steve Jobs, CEO pay, which was really fascinating. Which, like, you know, he's like, pay me nothing or pay me more than everyone else, but don't pay me anything in the middle. I love that. Okay, so that's. I think that's it for the segmenty bit, but we do have the numbers round. And Tim, because you're the guest, I.
- [41:18]
D
Get to go first.
- [41:18]
B
You get to go first.
- [41:19]
D
So my number this week is zero. And that is the number of Nobel Memorial Prizes in economics that have been awarded to female economists.
- [41:32]
C
What?
- [41:33]
D
There is one econ Nobel that's been awarded to a woman, the very wonderful Eleanor Ostrom. And if I can plug myself for a second, if you. If you search for Tim Harford, Eleanor Ostrom, pop up ideas, you will find a short radio program I did all about Lynn Ostrom. She's brilliant, but she's a political scientist, and she wanted to study economics, but she couldn't. And she couldn't because in high school, she was told she couldn't study maths, and she was told she couldn't study maths because she was a girl. So we are still waiting for our first. We have a very wonderful female econ Nobel laureate, but she's not an economist. And so we wait for our first female economist to win the econ.
- [42:12]
B
I will add to that number that 0 is also the number of women who won any kind of Nobel Prize this year across all of the disciplines, which is kind of scary.
- [42:23]
D
Yeah.
- [42:23]
C
The new age for feminism, people, really is. I have hope. I have a number. It's 1.4 million. And I want Jordan to weigh in on this. 1.4 million people in 32 states are poised to lose Obamacare because of the insurance companies pulling out of Obamacare. And at the same time, I've heard all sorts of complaints that the premiums are going up. So I don't understand, like, if people are paying more, why are these insurance companies removing themselves?
- [42:52]
A
It seems like part and part supply.
- [42:54]
C
And demand is failing somehow.
- [42:56]
A
It's part and parcel of the same issue. It's that company insurers are raising their rates because they've been losing money. And some, rather than raising rates, are choosing to pull out of certain markets because they just don't think it's possible to be profitable in those markets. So that's doesn't it make sense to.
- [43:11]
C
Raise rates first and then decide it?
- [43:14]
A
You might look at a certain region and just decide that there's no way you can attract customers with by raising rates because the price will just scare them off. So it's. You're just going to have to pull out. It's just not worth it after a certain point.
- [43:26]
D
Point.
- [43:27]
A
Or you might decide that there are just too many sick people there that like, you know, it's. The population is too ill, too sick, too old, and that, you know, it's just not worth the stress and strain.
- [43:35]
C
Are they really losing money or are they just not making money?
- [43:38]
A
Some are. Some are outright losing money. Some are making. There are some making money, too. I mean, they get less attention, but there are some who are major companies that are losing money.
- [43:47]
B
It's almost as if what you want is a national system where the areas which make money will cross subsidize the area. Never mind. My number is also helpful. It is 885,169,400, which is a very.
- [44:06]
D
Large number and a precise one. What is it?
- [44:10]
B
It is a surprisingly precise number. It is the. We just had the release of the Lancet Global Burden of disease study for 2015, and that is the number of cases of genital herpes found worldwide last year.
- [44:27]
C
Wow.
- [44:27]
B
885 million people.
- [44:30]
A
That's.
- [44:31]
C
Let's just admit everybody has herpes. I mean, I'm not raising my hand, but you know what I'm saying.
- [44:35]
B
But it is one of these things which is vastly more common than anyone thinks. It is ubiquitous.
- [44:42]
A
I wonder what that does to quality adjusted life years in the world, just the sheer amount of herpes.
- [44:48]
B
So much herpes.
- [44:49]
A
All right, my number's a little personal this week, but it is.
- [44:54]
B
I'll have the herpes number. You can have the personal number.
- [44:57]
A
Thankfully, my. Thankfully, the herpes number is not a personal number. But so my number, 65 million. And that is the price that was paid for the Empire State Building in 1961 when Harry Helmsley. In dollars. Yeah, sorry, $65 million in 1961. Larry Wein and Harry Helmsley, a kind of real estate magnet, New York legend, purchased it back then, and it was what was known as a real estate syndication. I'm not gonna get into the details of those, but it is a way that basically normal people can kind of buy into a big commercial real estate property. And the deal was described as so complicated that it took years and years for anyone to figure out how it worked. And the person who actually negotiated it was, excuse me, was my grandfather, Robert Weissman. He was about my age at the time. He was about 30. And sorry, this is more emotional than I thought. He recently passed away. He was at 86 years old. And he was just spectacular. He was a spectacular guy and played a little role in shaping the city and in shaping the way corporate real estate and finance kind of meshed.
- [46:13]
B
So thank you, Jordan's grandfather, for making real estate incredibly complicated.
- [46:17]
A
Yep, exactly. Yeah.
- [46:21]
B
Okay. Well, and thank you all you lovely listeners out there for making it to the end of this fabulous Tim Harford edition of Slate Money. Thank you especially to Tim for coming all the way from London just to be here.
- [46:35]
C
Amazing.
- [46:36]
B
And you know what, Tim, just for you, we don't normally do this for guest authors on this show, but I'm going to allow you to plug your book one more time.
- [46:46]
D
You mean Messy The Power of Disorder to Transform Our Lives, Available in all good bookshops.
- [46:51]
B
That's the one. Thank you to Virilen Williams, who produced it, and to Steve Lichti and Annie Bowers, the executive producers. Send us your emails slatemoneylate.com subscribe to the show. There's probably a button on your phone right now you can just press, which will subscribe you to this. Leave a review on the Itunes store. Check out the Panoply network of podcasts@itunes.com Panoply and we'll he will talk to you next week on Sleep Money.